A Blanket Wraps Secure Computing

My portfolio is loaded with tech stocks that I believe to be widely misunderstood and, therefore, mispriced. Among those on the list are Oracle (Nasdaq: ORCL  ) , Taiwan Semiconductor (NYSE: TSM  ) , and Akamai Technologies (Nasdaq: AKAM  ) , which I made a pick for Motley Fool Rule Breakers more than 250% ago.

Now you can add Secure Computing (Nasdaq: SCUR  ) to that list. Last week, the company, which sells devices that guard networked businesses, reported Q3 results that gave Wall Street the shivers. Except that shouldn't have been the case. Excluding one-time items and the firm's acquisition of CipherTrust, Secure Computing earned $0.10 on $42.5 million in sales, both of which easily beat Street estimates. (Get all the numbers here.)

But investors focused instead on the $0.14 per-share net loss Secure Computing incurred according to generally accepted accounting principles (GAAP), sending the shares lower by 11% since the day of the report.

Much as I am in favor of GAAP reporting, there are plenty of times when using non-GAAP figures is helpful. That's the case with Secure Computing, which only completed the CipherTrust deal in September. One-time costs related to the acquisition will continue to appear on the income statement for at least one more quarter, company Chief Financial Officer Tim Steinkopf told me in an interview on Friday.

That's why I'm remaining focused on the longer term. Where others see losses, I see a business capable of producing excellent cash flow thanks to rapidly rising deferred revenue. In English, that means Secure Computing is increasingly being paid up front for security services it will perform over a given period. Cash from operations improved by more than $7 million during the quarter as a result.

What's more, executives say that CipherTrust's Trusted Source technology -- which rates data senders in the same way that Equifax rates your creditworthiness -- is being built into products for stopping threats at network gateways (think hackers), at Web gateways (think viruses), and at messaging gateways (think spam). That's likely to lead to more services deals and could return margins, which have been depressed by acquisitions, to higher levels.

But all that will take time. Fortunately, management has a compelling vision for what could be. Last year at this time, for example, executives said their goal was for Secure Computing to book $1 billion in revenue by the end of 2010. That's 55% annual growth over the next four and a half years!

You'd think after disappointing investors earlier this year that management would want to cut back on its projections. Steinkopf, however, will have none of it; he continues to insist the projection is "realistic." If he's anywhere close to correct, the continuing sell-off of Secure shares over short-term concerns could make for one of the most compelling long-term bargains we've seen since, well, Akamai.

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Fool contributor Tim Beyers owns shares of Secure Computing, Taiwan Semiconductor, Oracle, and Akamai. Get the skinny on everything Tim is invested in by checking his Fool profile. The Motley Fool's disclosure policy is a rebel with a cause.


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